Bridge Loan: How It Works and When to Use It

What is a Bridge Loan?

A bridge loan is a short-term loan designed to provide immediate financing while a borrower waits for longer-term financing or for an existing property to sell. Often used in real estate transactions, bridge loans “bridge the gap” between the purchase of a new property and the sale of an existing one.

Bridge loans are popular because they offer fast access to funds but come with higher interest rates and shorter repayment terms, typically between 6 and 12 months.

How a Bridge Loan Works

• Collateral: Typically secured by the borrower’s current home or property.
• Loan Amount: Often up to 80% of the combined value of the two properties (current and new).
• Repayment: Borrowers may pay monthly interest-only payments, with the principal due at the end of the term, or pay off the entire balance upon the sale of the existing home.
• Interest Rates: Generally higher than traditional mortgages, reflecting the higher risk to lenders.

Some lenders offer no-payment bridge loans, where all interest is rolled into the loan balance, allowing borrowers to defer payments until their current home sells.

Typical Use Cases for Bridge Loans

🏠 Buying a New Home Before Selling

Bridge loans allow homeowners to make a non-contingent offer on a new home without waiting to sell their current home first.

🏢 Real Estate Investment

Investors use bridge loans to acquire and renovate properties quickly, then refinance into long-term financing once the project is stabilized.

🏗️ Commercial Property Transition

Businesses use bridge loans to transition into new locations while their current property is on the market.

Pros and Cons of Bridge Loans

✅ Pros

• Fast Access to Cash: Funding can close in days, ideal for competitive real estate markets.
• Non-Contingent Offers: Stronger position when buying a new home without a home sale contingency.
• Flexible Repayment Options: Interest-only payments or deferred payments until home sale.

❌ Cons

• Higher Interest Rates: Typically 1.5%–3% higher than conventional mortgages.
• Short Repayment Term: Typically must be repaid within 6–12 months.
• Additional Fees: Closing costs, origination fees, and other costs can add up.
• Risk if Home Doesn’t Sell: Borrowers could be stuck paying two mortgages or forced to sell at a lower price.

Bridge Loan vs Traditional Mortgage

Bridge loans are not a replacement for a mortgage but a temporary solution for specific, time-sensitive needs.

How to Qualify for a Bridge Loan

Lenders typically look for:

• Strong Equity: Substantial equity (at least 20–30%) in your current property.
• Good Credit Score: Generally 680+ for best rates and terms.
• Low Debt-to-Income Ratio: Preferably under 43%.
• Solid Exit Strategy: Clear plan to repay the loan, usually through the sale of the current property.

Tip: A detailed plan showing your current home is already listed or under contract will strengthen your bridge loan application.

Bridge Loans for Real Estate Investors

Real estate investors use bridge loans to:

• Quickly acquire distressed properties at auction or below market value.
• Fund renovation projects before refinancing under a BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy.
• Secure deals when permanent financing is delayed or takes too long.

Because speed is critical in real estate investing, bridge loans can be a vital part of an investor’s financing toolkit — but careful management is crucial to avoid overleveraging.

Alternatives to a Bridge Loan

If a bridge loan isn’t ideal, consider:

• Home Equity Line of Credit (HELOC): Tap into existing home equity at lower rates.
• Home Equity Loan: Lump-sum borrowing secured by current home equity.
• Personal Loan: For smaller funding needs, though rates are typically higher.
• Sale-Leaseback: Sell your current home but lease it back temporarily while transitioning to a new property.
• Contingency Clauses: Make your new home purchase offer contingent on selling your existing home, though less competitive.

Final Thoughts

A bridge loan can be a powerful tool to enable seamless real estate transactions, secure investment opportunities, or transition into a new home without delays. However, because of the higher rates, short terms, and inherent risk, it’s essential to approach bridge financing with a solid plan.

Before pursuing a bridge loan, evaluate your timeline, repayment strategy, and backup options carefully to ensure it’s the right financial move for your situation.